Were a public-school employee's 1099 payments for gym monitoring and one annual student trip taxable independent-contractor business receipts?

Plain-English summary

Larry Gonzales did not owe gross receipts tax on payments for monitoring a public-school gym or chaperoning one annual overseas student trip. The gym work occurred within his Albuquerque Public Schools employment, and the trip was an isolated and occasional educational activity rather than a separate business.

Gonzales was an APS teacher, basketball coach, and athletic director. The Albuquerque Youth Basketball League could use APS gyms only when an APS employee was present. At his principal's direction, Gonzales opened, monitored, protected, and closed the facility, while AYBL paid him directly and issued Form 1099-MISC.

Each summer, Gonzales also served as a teacher-chaperone for one Education First Cultural Exchange trip. That organization developed the curriculum and itinerary with him, paid him directly, and issued another Form 1099-MISC.

Direct third-party payment did not defeat employee status

Employee classification depended on the whole relationship, especially control. Not every regulatory indicator was present: AYBL did not withhold tax, pay FICA, or provide ordinary employment benefits.

But APS controlled the gym activity. The principal assigned the work, the service protected APS property, APS required an employee onsite, and there was no evidence APS allowed Gonzales to operate a private monitoring business from school property.

Under those unique facts, Gonzales functionally performed the work within the scope of APS employment. Section 7-9-17 excluded the wages from gross receipts tax.

One annual educational trip was isolated and occasional

The chaperone service occurred once a year, was closely related to Gonzales's teaching, involved an apparently APS-approved program, and had no evidence of advertising, sales activity, or holding himself out as a travel business.

The AHO found the activity exempt under Section 7-9-28 as isolated or occasional and alternatively found that Gonzales was not engaged in business in that limited context.

Credible testimony shifted the burden

The Department assessed the Form 1099 amounts after a federal Schedule C mismatch. Gonzales credibly explained the APS and Education First arrangements and had reported all income for income-tax purposes.

That evidence overcame the assessment presumption. The Department could have obtained APS and program agreements to challenge it but did not reestablish the assessment's correctness.

Penalty had already been abated before hearing because Gonzales used a CPA. At the hearing, the Department claimed $1,266.06 of tax and $205.34 of interest.

Result: protest GRANTED. The AHO ordered the entire assessment abated.

What this means for you

Employees receiving Form 1099 payments

The form does not by itself determine gross receipts tax status. Document who directed the work, whose property and interests were served, and whether the activity was within an existing employment relationship.

Teachers and other professionals doing occasional programs

Frequency, advertising, market activity, duration, and connection to regular employment matter. A once-a-year related service may differ from holding yourself out as a separate business.

Taxpayers responding to Schedule C mismatches

Federal income reporting and state gross-receipts treatment answer different questions. Provide specific facts and agreements explaining why a receipt is wages, exempt, or outside business activity.

Common questions

Q: Why did AYBL issue a Form 1099?
A: AYBL paid Gonzales directly for monitoring time, but the AHO still found the work functionally within APS employment.

Q: What showed APS control?
A: His principal directed the work, APS required an employee onsite, and the activity protected APS facilities.

Q: Why was the annual trip not taxable business activity?
A: It occurred once yearly, related closely to teaching, and involved no promotional activity or holding out as a business.

Q: Did Gonzales report the income federally?
A: Yes. He reported the 1099 income on Schedule C and paid income tax.

Q: What did the AHO abate?
A: The full assessment, including the tax and interest still claimed at hearing.

Citations and references

Statutes and regulations:

• NMSA 1978, §§ 7-9-17 and 7-9-28 — employee-wage exclusion and isolated-or-occasional-service exemption
• NMSA 1978, §§ 7-9-3.3, 7-9-3.5, 7-9-4, and 7-9-5 — business, gross receipts, tax, and receipt presumption
• Regulations 3.2.105.7 and 3.2.116.8 NMAC — employee-status and isolated-activity factors

Cases cited:

• Harger v. Structural Services, 1996-NMSC-018 — control in employee-versus-contractor analysis
• Celaya v. Hall, 2004-NMSC-005 — Restatement employment factors and case-specific circumstances
• MPC Ltd. v. New Mexico Taxation and Revenue Department, 2003-NMCA-021 — burden shifts after credible contrary evidence

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Larry J. Gonzales
• Decision PDF: D&O 15-41

Original ruling text

STATE OF NEW MEXICO
ADMINISTRATIVE HEARINGS OFFICE
TAX ADMINISTRATION ACT

IN THE MATTER OF THE PROTEST OF
LARRY J. GONZALES No. 15-41
TO ASSESSMENTS ISSUED UNDER LETTER
ID NO.’s L0857997360, L1931739184, L0186908720 and L1260650544

DECISION AND ORDER

A protest hearing occurred on the above captioned matter on October 30, 2015 before

Brian VanDenzen, Esq., Interim Chief Hearing Officer, in Santa Fe. At the hearing, Larry J.

Gonzales (“Taxpayer”) appeared along with his representative, Dennis Kennedy, CPA. Staff

Attorney Gabrielle Dorian appeared representing the State of New Mexico Taxation and

Revenue Department (“Department”). Protest Auditor J. Amanda Carlisle appeared as a witness

for the Department. Taxpayer Exhibits #1, a letter from Mr. Kennedy, CPA, was admitted into

the record. Department Exhibit A, an updated spreadsheet of alleged liabilities as of the hearing

date, was admitted into the record. Based on the evidence and arguments presented, IT IS

DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. On April 27, 2015, through letter id. no. L0857997360, the Department assessed

Taxpayer for $256.40 in gross receipts tax, $51.28 in penalty, and $58.21 in interest for a total

assessment of $365.89 for the CRS reporting periods from January 1, 2008 through December

31, 2008.

2. On April 27, 2015, through letter id. no. L1931739184, the Department assessed

Taxpayer for $329.10 in gross receipts tax, $65.82 in penalty, and $59.67 in interest for a total
assessment of $454.59 for the CRS reporting periods from January 1, 2009 through December

31, 2009.

3. On April 27, 2015, through letter id. no. L0186908720, the Department assessed

Taxpayer for $238.98 in gross receipts tax, $47.49 in penalty, and $33.82 in interest for a total

assessment of $320.59 for the CRS reporting periods from January 1, 2010 through December

31, 2010.

4. On April 27, 2015, through letter id. no. L1260650544, the Department assessed

Taxpayer for $441.58 in gross receipts tax, $88.32 in penalty, and $46.61 in interest for a total

assessment of $576.51 for the CRS reporting periods from January 1, 2011 through December

31, 2011.

5. On June 8, 2015, Taxpayer protested the Department’s assessment, asking for

abatement of all assessed tax principal, penalty, and interest.

6. On June 11, 2015, the Department’s protest office acknowledged receipt of the

protest.

7. On July 29, 2015, the Department filed a request for hearing in this matter with

the Administrative Hearings Office, a separate, independent agency from the Department.

8. On July 30, 2015, the Administrative Hearings Office sent Notice of Telephonic

Scheduling Conference, scheduling this matter for a scheduling hearing on August 14, 2015.

9. On August 14, 2015, a Scheduling Conference Hearing occurred. The parties did

not object that conducting the scheduling hearing satisfied the requirement that a hearing be set

within 90-days of protest.

10. On August 14, 2015, the Administrative Hearings Office issued a Notice of

Administrative Hearing in this matter, setting the merits hearing for September 15, 2015.

In the Matter of the Protest of Larry J. Gonzales, page 2 of 13

11. On September 8, 2015, the Department moved to continue the merits hearing,

citing concerns about presentation of federal confidential taxpayer information without a specific

agreement in place with the IRS that would allow it to share the information with the newly-

created, independent Administrative Hearings Office (this issue has subsequently been resolved).

Taxpayer did not object.

12. On September 10, 2015, the Administrative Hearings Office issued a Continuance

Order and Amended Notice of Administrative Hearing, rescheduling this matter for a merits

hearing on October 30, 2015.

13. Taxpayer is employed as a math and physical education teacher with Albuquerque

Public Schools (“APS”). Over his thirty years at APS, Taxpayer has also been employed as a

basketball coach and athletic director at the school where he works.

14. During the relevant period, APS had an arrangement with the Albuquerque Youth

Basketball League (“AYBL”) whereby that organization could use APS gym facilities for

extracurricular practices and sports events not otherwise part of APS’ formal athletics

programing.

15. APS would only allow AYBL to use APS facilities if an APS employee was

present during the activity.

16. As part of the performance of his job duties as athletic director and at direction of

his school’s principal, Taxpayer was responsible for supervising school and sport activities in the

school gym.

17. Taxpayer was tasked with monitoring and protecting APS’ property when AYBL

used the gym. When AYBL used the gym at his school, Taxpayer opened the facility, monitored

the practice/activity, and closed the facility at the conclusion of the event.

In the Matter of the Protest of Larry J. Gonzales, page 3 of 13

18. This activity occurred approximately five-months a year, one to four times per

week.

19. On a weekly basis, AYBL paid Taxpayer for his time serving as a monitor by

check.

20. At the end of each relevant year, AYBL provided Taxpayer with 1099-MISC for

all the money it had paid Taxpayer in that year.

21. In the summer, Taxpayer also served as a teacher-chaperone on one overseas

student trip per year with an organization called Education First Cultural Exchange.

22. According to Taxpayer’s otherwise credible testimony, Education First Cultural

Exchange is an APS Board approved program.

23. Education First Cultural Exchange develops the curriculum and itinerary for the

cultural exchange trip with Taxpayer.

24. Taxpayer is paid directly by Education First Cultural Exchange at the end of the

annual trip.

25. Education First Cultural Exchange provides Taxpayer with a 1099-MISC at the

end of the year.

26. Taxpayer receives a W-2 from APS for his annual teacher wages.

27. Taxpayer’s accountant Mr. Kennedy, CPA, helped prepare Taxpayer’s tax returns

each of the relevant years.

28. Taxpayer did not file or pay gross receipts tax in any of the relevant years because

he believed he was not engaged in business and thought all his income was earned within the

scope of his employment at APS.

In the Matter of the Protest of Larry J. Gonzales, page 4 of 13

29. Taxpayer did report and pay income tax on all of the 1099-MISC income listed

on his federal Schedule C in each relevant year.

30. Through its Schedule C Tape Mismatch Program with the IRS, the Department

detected a mismatch between the income reported on Taxpayer’s federal Schedule C and the lack

of a CRS return reporting and paying gross receipts tax.

31. Based on the mismatch information, the Department issued the assessments

described in findings of fact #1 through #4.

32. After Taxpayer filed its protest but before the scheduled hearing, the Department

abated the penalty in this case.

33. As of the date of hearing, the Department alleged that Taxpayer owed $1266.06 in

gross receipts tax and $205.34 in interest. [Dept. Ex. A].

DISCUSSION

There are two main issues involved in this protest. The first issue is whether the income

Taxpayer earned from AYBL and/or the Education First Cultural Exchange Program was in his

scope as an employee of APS and therefore exempt from gross receipts tax. The second issue is

even if Taxpayer earned the income as an independent contractor, whether Taxpayer

nevertheless was exempt from gross receipt tax because of the isolated and occasional nature of

the work does not amount to engaging in business. Because Taxpayer used the services of a

CPA to prepare and file his tax returns, the Department properly abated penalty and therefore

that assessed amount is not at issue in this protest.

Presumption of Correctness.

Under NMSA 1978, Section 7-1-17 (C) (2007), the assessments issued in this case are

presumed correct. Consequently, Taxpayer has the burden to overcome the assessment. See

In the Matter of the Protest of Larry J. Gonzales, page 5 of 13
Archuleta v. O'Cheskey, 1972-NMCA-165, ¶11, 84 N.M. 428. Accordingly, it is Taxpayer’s

burden to present some countervailing evidence or legal argument to show that it is entitled to an

abatement, in full or in part, of the assessment issued against it. See N.M. Taxation & Revenue

Dep't v. Casias Trucking, 2014-NMCA-099, ¶8. “Unsubstantiated statements that the assessment

is incorrect cannot overcome the presumption of correctness." See MPC Ltd. v. N.M. Taxation &

Revenue Dep't, 2003 NMCA 21, ¶13, 133 N.M. 217. Moreover, “[w]here an exemption or

deduction from tax is claimed, the statute must be construed strictly in favor of the taxing authority,

the right to the exemption or deduction must be clearly and unambiguously expressed in the statute,

and the right must be clearly established by the taxpayer.” Wing Pawn Shop v. Taxation and

Revenue Department, 1991-NMCA-024, ¶16, 111 N.M. 735 (internal citation omitted); See also

TPL, Inc. v. N.M. Taxation & Revenue Dep't, 2003-NMSC-7, ¶9, 133 N.M. 447. When a taxpayer

presents sufficient evidence to rebut the presumption, the burden shifts to the Department to

show that the assessment is correct. Once a taxpayer rebuts the presumption of correctness, the

burden shifts to the Department to show the correctness of the assessed tax. See MPC Ltd., 2003

NMCA 21, ¶13.

Gross Receipts Tax, Employee Wages, and Isolated and Occasional Sales

For the privilege of engaging in business, New Mexico imposes a gross receipts tax on the

receipts of any person engaged in business. See NMSA 1978, § 7-9-4 (2002). Under NMSA

1978, Section 7-9-3.5 (A) (1) (2007), the term “gross receipts” is broadly defined to mean

the total amount of money or the value of other consideration received from
selling property in New Mexico, from leasing or licensing property employed in
New Mexico, from granting a right to use a franchise employed in New Mexico,
from selling services performed outside New Mexico, the product of which is
initially used in New Mexico, or from performing services in New Mexico.

In the Matter of the Protest of Larry J. Gonzales, page 6 of 13
“Engaging in business” is defined as “carrying on or causing to be carried on any activity with

the purpose of direct or indirect benefit.” NMSA 1978, § 7-9-3.3 (2003). Gross receipts applies

to the performance of a service in New Mexico. See NMSA 1978, § 7-9-3.5 (2007). Under the

Gross Receipts and Compensating Tax Act, there is a statutory presumption that all receipts of a

person engaged in business are taxable. See NMSA 1978, § 7-9-5 (2002).

In this protest, Taxpayer argued that he was merely an employee of APS when he monitored

APS’ gym facility at Taxpayer’s school while AYBL used the facility. Exempted from gross

receipts taxes are the wages of employees. See NMSA 1978, § 7-9-17. A person who is an

employee is not required to register, file, or pay gross receipts tax. See § 7-9-5 (A) and Regulation

3.2.100.8 NMAC. The determination of whether a taxpayer is an employee is a fact intensive

inquiry. Regulation 3.2.105.7 (A) NMAC lists seven criteria for the Department to use in

determining whether a person is an employee for the purposes of the exemption under Section 7-9-

17:

A. In determining whether a person is an employee, the department will
consider the following indicia:
(1) is the person paid a wage or salary;
(2) is the "employer" required to withhold income tax from the person's
wage or salary;
(3) is F.I.C.A. tax required to be paid by the "employer";
(4) is the person covered by workmen's compensation insurance;
(5) is the "employer" required to make unemployment insurance
contributions on behalf of the person;
(6) does the person's "employer" consider the person to be an employee;
(7) does the person's "employer" have a right to exercise control over the
means of accomplishing a result or only over the result (control does not
mean "mere suggestion").

Under Regulation 3.2.105.7 (B) NMAC, “[i]f all of the indicia mentioned in Subsection A of

Section 3.2.105.7 NMAC are present, the department will presume that the person is an employee.

However, a person may be an employee even if one or more of the indicia are not present.”

In the Matter of the Protest of Larry J. Gonzales, page 7 of 13
In New Mexico, the question of whether a person is an employee or independent contractor

turns on control. See Harger v. Structural Servs., 1996-NMSC-018, ¶12, 121 N.M. 657. See also

Rock v. Comm'r of Revenue, 1972-NMCA-012, ¶5, 83 N.M. 478. New Mexico courts have

looked to the Restatement (Second) of Agency §220 for guidance on the question of employee

versus independent contractor. See Celaya v. Hall, 2004-NMSC-005, ¶11, 135 N.M. 115. In

addition to control, the New Mexico Supreme Court noted that the Restatement (Second) of

Agency §220 identifies numerous other factors for consideration:

1) the type of occupation and whether it is usually performed without
supervision; 2) the skill required for the occupation; 3) whether the
employer supplies the instrumentalities or tools for the person doing the
work; 4) the length of time the person is employed; 5) the method of
payment, whether by time or job; 6) whether the work is part of the
regular business of the employer; 7) whether the parties intended to create
an employment relationship; and 8) whether the principal is engaged in
business. Furthermore, a complete analysis may require an assessment
not only of the relevant factors enumerated in the Restatement, but of the
circumstances unique to the particular case.

Celaya v. Hall, 2004-NMSC-005, ¶15 (citations omitted and emphasis added).

Applying the criteria under Regulation 3.2.105.7 (B) NMAC and case law to the facts of this

case, Taxpayer established that he was serving as an employee of APS in performance of his

monitoring of APS’ gym facilities even if not all the factors under the regulation were met. There is

no evidence on factors two through five that Taxpayer had income tax withheld from his

payment of wages from AYBL, that FICA was paid from these wages, and that worker’s

compensation insurance or unemployment insurance were paid. Taxpayer was paid an hourly

wage for his time monitoring APS’ gym facility while AYBL used the facility. While AYBL was

the one to pay Taxpayer for the monitoring time, presumably pursuant to APS’ agreement with

AYBL (which neither party actually presented into the record), all other circumstances in this

case support that Taxpayer performed the service within the scope of his APS employment.

In the Matter of the Protest of Larry J. Gonzales, page 8 of 13
Most importantly under the regulation and the case law, Taxpayer as a teacher and

athletic director was directed by his school’s principal to arrange use and monitor the gym

anytime AYBL used the APS’ facility. Taxpayer performed the monitoring duties at direction of

his APS supervisor and in furtherance of APS’ interest in protecting its own property. There is

no evidence presented that APS had a formal or informal agreement in place with Taxpayer that

would have allowed Taxpayer to conduct his alleged independent contracting business activity

using APS property. There is no evidence that Taxpayer himself had liability insurance that

would cover damage to APS’ property or liability for use of that property or injury while

Taxpayer monitored the gym, which one could reasonably conclude would be an absolute

requirement for use of a public school facility for any private or business purpose. Taxpayer

indicated that APS would only allow use of its gym facilities when one of its employees were

present, which is why he monitored the activity. While it is true that Taxpayer was remunerated

directly for his time by AYBL, under these unique circumstances where Taxpayer’s school

principal directed him to arrange and supervise AYBL’s use of the APS’s facility, where APS

had an agreement in place with AYBL which required an APS employee to monitor APS’ gym

facilities while in use, Taxpayer functionally did so within the scope of his APS employment.

Regarding the Education First Cultural Exchange receipts, Taxpayer argued that he was

not engaged in business but only participating on a limited basis. Exempt from gross receipts tax

under NMSA 1978, Section 7-9-28, are

…the receipts from the isolated or occasional sale of or leasing of
property or a service by a person who is neither regularly engaged nor
holding himself out as engaged in the business of selling or leasing the
same or similar property or service.

In the Matter of the Protest of Larry J. Gonzales, page 9 of 13
Under Regulation 3.2.116.8 NMAC,

The department will use the following criteria, but not exclusively, in determining
whether or not a transaction involves only an "isolated or occasional" sale or lease:
A. the nature of the service or property;
B. the nature of the market for the service or property sold or leased;
C. the number of sales or leases made within a given period;
D. the regularity of the sales;
E. the duration of the sales or leasing activity;
F. any promotional activity such as advertising or telephone yellow page listings;
and
G. any holding out as being in business by the seller or lessor.

Under this standard and the unique circumstances of this case involving a teacher, Taxpayer’s

once-annual overseas educational program (a program apparently approved by the APS Board) is

an isolated and occasional activity exempted from gross receipts under 7-9-28. Taxpayer was

providing an educational service closely related to his employment at APS for a program

apparently approved by APS. The market for that service is for students interested in overseas

educational activities, again closely related to Taxpayer’s employment at APS. In previous

hearings, Department auditors have suggested that if the activity occurs more than once, it would

not meet the Department’s isolated and occasional standard. The trip occurred once per year, not

violating that purported internal standard. There is no evidence that Taxpayer engaged in any

promotional or sales activity related to the trip. Taxpayer was not holding himself out as a

business or being in business as it relates to the school trips. The isolated and occasional nature

of that activity for a narrow and limited purpose generally related and closely associated with his

employment activity is exempted from gross receipts tax under Section 7-9-28.

Even if Taxpayer’s school-related once per year trip does not qualify for the isolated and

occasional exemption under Section 7-9-28, given the limited nature of that activity closely

related to Taxpayer’s work as a teacher at APS, and even under the broad definition of engaging

In the Matter of the Protest of Larry J. Gonzales, page 10 of 13
in business, in this limited context Taxpayer was not engaged in business. Nor was Taxpayer

engaged in business for the AYBL monitoring activity.

Taxpayer had the initial burden to overcome the presumption of correctness, which

occurred in this case through Taxpayer’s credible testimony establishing the evidence that he

was an employee of APS. While MPC Ltd., ¶13, and Regulation 3.1.6.12(A) NMAC does not

allow a taxpayer to overcome the presumption simply by making conclusory statements that the

assessment was incorrect, that is not what Taxpayer did in this protest. Taxpayer’s credible

testimony, which is fully admissible evidence, established that he was an employee of APS

acting within that scope when he earned the receipts in question. In other words, Taxpayer was

simply not making conclusory statements that the assessments were wrong, but providing

credible, factual evidence showing why the assessments were factually and legally incorrect.

Under MPC Ltd. 2003 NMCA 21, ¶13, the burden then shifted back to the Department to

establish the correctness of its assessment. In preparation for that potential, the Department could

have requested copies of APS’ agreement with AYBL, the APS-Teacher collective bargaining

agreement, or APS’ agreement/approval of the Education First Cultural Exchange program,

which it could have used to challenge Taxpayer’s assertions about the nature of those

agreements/transactions. The Department did not reestablish the correctness of its assessment or

successfully attack the credibility of Taxpayer’s testimony. While the definition of engaging in

business is admittedly quite broad, a common sense, non-technical analysis of this fact pattern

clearly established that this Taxpayer was not a person engaged in business other than to conduct

work closely associated with his employment and work as a teacher. Taxpayer’s protest is

granted and the entire assessment is ordered abated.

In the Matter of the Protest of Larry J. Gonzales, page 11 of 13
CONCLUSIONS OF LAW

A. Taxpayer filed a timely, written protest to the Department’s assessments, and

jurisdiction lies over the parties and the subject matter of this protest.

B. The hearing was timely set within 90-days of protest under NMSA 1978, Section 7-

1-24.1 (2013).

C. Taxpayer overcame the presumption of correctness that attached to the assessments

under NMSA 1978, Section 7-1-17 (C) (2007) and Archuleta v. O'Cheskey, 1972-NMCA-165,

¶11, 84 N.M. 428.

D. Taxpayer’s activities of monitoring APS’ gym facilities while AYBL used the

facilities occurred within Taxpayer’s scope of employment for APS and the wages for that activity

were exempt from gross receipts tax under NMSA 1978, Section § 7-9-17, Regulation 3.2.105.7 (A)

NMAC, Restatement (Second) of Agency §220.

E. Taxpayer’s chaperoning of the educational overseas trip was not for a business

purpose, did not constitute engaging in business, and were isolated and occasional subject to

exemption under NMSA 1978, Section 7-9-28.

F. Once Taxpayer overcame the presumption of correctness, the burden shifted to the

the Department to reestablish the correctness of its assessments, which the Department was unable

to do in this case. See MPC Ltd. v. N.M. Taxation & Revenue Dep't, 2003 NMCA 21, ¶13, 133

N.M. 217.

For the foregoing reasons, the Taxpayers’ protest IS GRANTED. IT IS ORDERED that

the Department abate all of the assessed tax.

In the Matter of the Protest of Larry J. Gonzales, page 12 of 13
DATED: December 29, 2015.

Brian VanDenzen
Interim Chief Hearing Officer
Administrative Hearings Office
P.O. Box 6400
Santa Fe, NM 87502

NOTICE OF RIGHT TO APPEAL

Pursuant to NMSA 1978, Section 7-1-25 (1989), the parties have the right to appeal this

decision by filing a notice of appeal with the New Mexico Court of Appeals within 30 days of the

date shown above. See Rule 12-601 NMRA. If an appeal is not filed within 30 days, this

Decision and Order will become final. Either party filing an appeal shall file a courtesy copy of

the appeal with the Administrative Hearings Office contemporaneous with the Court of Appeals

filing so that the Administrative Hearings Office may being preparing the record proper.

In the Matter of the Protest of Larry J. Gonzales, page 13 of 13